China faces second bond default amid world’s biggest debt overload

Bloomberg|

Updated: Jul 18, 2014, 10.52 AM IST

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SHANGHAI/BEIJING: China faces what would be the second default in the nation’s onshore bond market after a builder said it may fail to make a payment next week, the latest sign of stress in the world’s biggest corporate debtload.

Huatong Road & Bridge Group Co, based in the northern province of Shanxi, said it may miss a 400 million yuan ($64.5 million) note payment due July 23, according to a statement to the Shanghai Clearing House on Thursday. Chairman Wang Guorui is assisting authorities with an official investigation, it said, without elaborating. Wang was removed from the Chinese People’s Political Consultative Conference Shanxi Committee on July 9 for suspected violations of the law, according to an official statement and media report last week.

Huatong Road would be the first to fail to pay both interest and principal, and would also be the first default in the interbank note market, the nation’s biggest bond bourse. Chinese firms have the most debt globally after increasing borrowings to $14.2 trillion as of December 31, surpassing the US’ $13.1 trillion, Standard & Poor’s said. “It’s very likely the company will default,” said Xu Hanfei, a bond analyst at Guotai Junan Securities. , the nation’s third-biggest brokerage.

Debt Due

An operator who answered the main line of Huatong Road on Friday wouldn’t comment on the issues and declined to transfer the call to related people. China Lianhe Credit Rating Co cut the company’s rating to BB+ from AA- to reflect the builder’s high default risks, according to a statement from the risk assessor today.

“The central bank, which regulates the interbank market, may permit defaults to help develop the corporate bond market by lowering moral hazards,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-largest brokerage.

Huatong Road said in its statement on Thursday that it’s exploring various channels to raise funds to pay off the one-year bond, according to the statement. It owes 429.2 million yuan in interest and principal by the due date, it said. The builder, which was set up in 1998, had 5.8 billion yuan of debt and 10.7 billion yuan of assets as of March 31, according to a separate statement in April on the Chinamoney website. It reported a profit of 62.7 million yuan for the first quarter.